Gold: Follow the USD Strength

Video Transcription:

Hello, traders. Welcome to the Pro Trading Course and the third module, Swing Trades: Follow Global Macro Trends. In this lesson, we are going to look at what drives gold prices and how are we going to fundamentally follow it’s trend on the macro sense of view. And the way we’re going to do it is by following the U.S. dollar strength.

Now gold and the U.S. dollar are negatively correlated. When the U.S. dollar is strong, prices in gold fall and when the U.S. dollar is weak gold prices rise. Now this inverse correlation has an explanation and a fundamental explanation to it. And you can’t just open a chart, decide and start trading gold based on the moves of the U.S. dollar, you need to understand why this negative correlation exists between the currency and the commodity.

The reason is that the commodity is quoted in U.S. dollars and when the U.S. dollar is strong it’s purchasing value rises. When the purchasing value of the currency rises, you can buy more of the base commodity which makes the commodity’s price to fall or the commodity’s price depreciates when the currency has more purchasing value. On the contrary, when the purchasing value of the U.S. dollar falls, you can buy less gold with one dollar which means the commodity’s price will rise and that’s the simple explanation of why gold prices and dollar prices are negatively correlated.

Now because we are going to look at the U.S. dollar strength in order to determine which way are we going to trade gold, we need to take a look at the U.S. dollar fundamentals to do it. This inverse correlation is crucial for gold traders and that’s why you need to pay attention on USD fundamentals when trading gold. On a period of dollar strength, look to sell gold and in a period of dollar weakness, look to buy it, all right. But it’s not as simple as that, remember that in this lesson we are only learning how to read the fundamentals of the instruments we are trading, we are not trading the instrument just yet, all right.

Now I’m gonna go to the charts right now and I’m going to show you a daily chart of gold, this is spot gold, all right. And I’m going to use an overlay indicator to look on the same chart the price of gold and the price of the U.S. dollar. Now the price of the U.S. dollar, we are going to look at in the dollar index or the DX and we have to look at the front month which is M6, all right. Now this is going to overlay the dollar chart with our gold chart all right. Now it looks a little messy but I’m going to zoom out all right, and I’m going to show you this period of dollar strength all right. The green and orange chart is the dollar index chart and the red and blue chart is gold chart right and as you can see, these two instruments or these two prices are extremely negatively correlated all right.

When, well when, when the price of the dollar rises the price of gold falls, all right. And when the price of dollar starts to fall the price of gold starts to rise, as you can clearly see on the past quarter and a half, or maybe two quarters. Since October last year, the price of gold had been in a very strong down movement right, moving from the 1185 level to the 1052 level, all right. That’s a move of 1400 pips. And at the same time what happens with the price of the dollar, all right? It moved from the, around the 94 level to the 100 level all right. So a very strong bullish momentum for the dollar and a very bearish momentum for gold and in this case when the U.S. dollar dipped from the 99 level to the 94 level, or around the 94 level, prices of gold rose from these lows to this year’s highs, around the 1275 level. So you can see by knowing where the price of the dollar is situated or knowing the fundamentals that are pushing the U.S. Dollar right now, you can actually know which way or which side of the market you are going to be trading on gold because just imagine that you didn’t know this and you were trying to make a short bet on the price of gold at this level right here. You are going to get burned very fast and very hard because you have no idea what is going on with the U.S. dollar so you have no idea that gold prices actually are going to be bouncing up because of the caution of the FED on its current policies on rate hikes. But in the end if you follow the price of the U.S. dollar you are going to be on the right side of the market when trading gold.

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